FRAUD IN THE NIGERIAN BANKING INDUSTRY: CAUSES, EFFECT AND PREVENTION

(A STUDY OF FIRST BANK PLC, LAGOS)

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CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Over the last decade, the growth in the rate of occurrence of frauds both successful and unsuccessful attempts have been shocking (Bolton and Hand, 2002). Oludifipe (1994) stated that even though the industry is becoming more militant and vigilant, millions of naira is still lost on a daily basis.

Fraud is a controversial general issue, which is a serious and diverse attachment to effort towards the development and progress of any establishment. It is a major predator of the business world and unyielding factor to all investment of human endeavors. Perhaps because fraud has received an extensive attention in the academic circles and, due largely to the fact that it has been over flogged in Nigeria, it has a definitional problem.

Shongotola (1994) sees bank fraud as any activity that lead to dishonest or unfair dealing. In its lexical meaning fraud is an act or course of deception or trickery deliberately practiced in order to gain some advantage dishonestly. To the Nigerian general public fraud is commonly known as corruption or 419 relates to section 419 of the criminal code of Nigeria.

Many banks has become technically distressed the number increasing from eight (8) in 1990 to forty two (42) in 1994 and fifty two (52) by the end of 2002. This was due to ineffective management and it has caused this menace to be inevitable in every banking industry or financial institution. Many concerned citizens see this problem as contributing to the poor performance of banks as evidenced by distress in the banking system (Oludifipe, 1994).

Ogwuma (1985) observed that the incidence of frauds in banking industry has in the recent past post a very serious threat to the very existence of financial institutions and is a matter of serious concern to the regulatory authorities and the banking public. Despite the stringent measures put in place by monetary authorities and internal control measures to check the activities of fraudsters, frauds in the banks stated by available statistics reveal that thirty one banks reported that they experienced frauds and forgery cases for the period January “ March, 1985.

Banks are institutions known to operate on the center-pin of public confidence. Today that concept no longer holds as bankers themselves either initiate frauds or partakes deeply in fraudulent activities against their banks (employers).

According to Nigerian Deposit Insurance Corporation (NDIC) Annual Reports most of those banks were run aground by a few greedy directors and officials who perpetrated frauds and all kinds of unethical practices against their institutions. This is an aberration that continues to erode public confidence in banks( Akpoyomare, 1996).

This scenario has singularly contributed to the liquidation of many banks. Adeyemi and Ogundele (2004) observed that one couldn’t avoid considering the fact that the distress in the banking industry was occasioned by fraud.

1.2 Statement of the Problems

The problem of frauds and even forgeries are endemic and spreading like harmattan fire in the banking industry. In Nigeria, frauds have assumed a frightened scale and sophisticated consequent upon the general economic and depression of the last decade. Despite the unique position of banks between other sectors of the economy, banks (especially commercial banks) are faced with a good number of economic crises. Notably among the cases is fraud.

Fraud in the industry has prevented many banks from achieving their goals. Some banks were just seen in the physical as body and building they were already liquidated and many were already in distress.

A lot of criticisms have emerged from the investing public about the non commitment and dedication to duty by Nigerian bankers. This stems from the fact that distress in the banking industry originated fraud, which was occasioned by bankers.

Directors and management of banks are also criticized for their inability to direct and control men and materials effectively. Poor accounting or reconciliation procedures may give an employee the opportunity to spot a weakness and devise a plan to take advantage of it. This is due to the weakness of internal controls in a bank. Understanding what motivates these individuals and how they are able to rationalize their behaviour is key to preventing it. Furthermore, they are criticized for using their positions and authorities to defraud their institutions. Repeated appeals and warning from well-meaning individuals and government for a change of these negative tendencies to the positive have yielded little or no dividend.

Criticisms have not been directed to bankers, Board of Directors and management alone. Government and regulatory authorities are being criticized for appointing men of doubtful integrity to oversee the affairs of banks and failing in their statutory role of supervision. While fraud have been in vogue in the banking or financial institutions, the situation worsened when those who should monitor and control fraudulent practices became the offenders. This is why the failed bank decree on frauds was targeted at the industry.

1.3 AIMS AND OBJECTIVES OF THE STUDY

The main purpose of this research is to examine fraud in the Nigerian banking industry. The objectives include the following:

1. To evaluate the perceived effects of fraud on the profitability of Nigerian banking industry.
2. To ascertain the causes of fraud in the Nigerian banking industry.
3. To examine the prevention of fraud in the Nigerian banking industry.
4. To determine the effect of fraud on the liquidity position of banks.

1.4 RELEVANT RESEARCH QUESTIONS

In assessing the purpose of the study, this research project seeks to answer the following questions:

1. To what extent does fraud affect the profitability of Nigerian banking industry?
2. What are the causes of fraud in the Nigerian banking industry?
3. How can fraud be prevented in the Nigerian banking industry?
4. To what extent has fraud affected the liquidity position of banks?

1.5 RELEVANT RESEARCH HYPOTHESES

In carrying out this research work the following theoretical statements are buttressed to serve as a direction on which the work will be premised:

1. H_o: There is no significant relationship between Bank fraud and the profit level of banks.

H₁: There is significant relationship between Bank fraud and the profit level of banks.

1. H_o: There is no significant relationship between bank fraud and liquidity position of banks.

H₁: There is significant relationship between bank fraud and liquidity position of banks.

1.6 SIGNIFICANCE OF THE STUDY

It is hoped that the findings and recommendations of the study will be of great benefit through the following ways:

The study will modify the attitude of Nigeria bankers from the negative influences of fraud to the positive aspect of honesty and integrity. It is also significance in the sense that it gives in details ways or measures to be employed by management of financial institution on how to combat fraud.

The result of this study if made available will help to enlighten Nigerians on the ills of frauds. It will help to remind government, bank managers, investors, industrialists and banking public of the effective but harmonious manner of curbing fraud and to enhance an excellent banking culture.

Again, the study will be of great benefit to the public by bringing to their awareness about the existence of fraud in the banking industry, providing insight through which their investment can be secured.

Furthermore, the study will broaden students understanding about the causes, prevention and the aftermath effect of fraud in the banking industry.

1.7 SCOPE OF THE STUDY

This research work seeks to examine fraud in the Nigerian banking industry with a view to explore First Bank of Nigeria Plc, Marina, Lagos. The study will cover the causes of fraud, effect and how it can be prevented in the banking sector. It will also cover the views of bankers, financiers and accountants on the subject matter.

The study as perceived might face some logistic challenges in terms of the time and the costs involved in carrying out the research, but nevertheless, it would endeavor to accomplish its aims and objectives.

 1.8 DEFINITION OF TERMS

Fraud: A deception deliberately practiced in order to secure unfair or unlawful gain.

Bank: A financial institution licensed as a receiver of deposits. There are two types of banks: commercial/retail banks and investment banks.

Financial Performance: A subjective measure of how well a firm can use assets from its primary mode of business and generate revenues. This term is also used as a general measure of a firm’s overall financial health over a given period of time, and can be used to compare similar firms across the same industry or to compare industries or sectors in aggregation.

Financial Institution: An establishment that focuses on dealing with financial transactions, such as investments, loans and deposits. Conventionally, financial institutions are composed of organizations such as banks, trust companies, insurance companies and investment dealers.

Forgery: The action of forging or producing a copy of a document, signature, banknote, or work of art.

REFERENCES

Adeyemi, S. B. and Ogundele, B. O.  (2004). The Development of Accounting in Nigeria.Global Journal of Accounting, (1): pp. 30 -30.

Akpoyomare, O. (1996).  The Use of Management Control Strategies in Defection and Prevention of Fraud. The Nigeria Management Review, 10 (1) pp. 68-69.

Bolton R. J., Hand D. J. (2002). Statistical fraud detection: A review Statistical Science 17(3) pp.235- 249.

Comer, M.J. (1985). Corporate Fraud. London: McGraw-Hill Book Company (UK.) Limited.

Ogwuma P. A. (1985). Problems and prospects of the Nigeria Banking industry. The financial institutions training centre. Pp. 5-7

Olufidipe, E. O. (1994). Fraud in the Nigerian economy and it’s implications for banks & financial institutions. The Nigerian Banker Journal, pp 7-10

Shongotola, I. O. (1994). Fraud detection and control. Nigeria Banker, pp.16-

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